Do investors trust advice from algorithm?

By Ravi Samalad |  11-12-19 | 
 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

A Financial Advice Market Review (FAMR) conducted by Financial Conduct Authority economists reveals that investors tend to reject advice from an algorithm. While the survey was conducted in U.K. its findings are relevant for robo advisers in India.

The survey covered 1,800 individuals to explore attitudes towards robo advice and potential underlying drivers. Investors were presented with hypothetical situations in which someone has been offered investment advice from a robo adviser. They were then asked whether they would recommend accepting or rejecting the advice.

These investors were also assessed for their own financial literacy and a range of other personal factors, including loss aversion, key personality traits and standardized measures of trust in corporations, banks and other people.

The study also gauged investors behavior when the solution offered by algorithm matched their risk profile and goals and when the solution did not match their expectations. In a majority of decisions (57%) the robo advice offered was rejected.

The survey showed that younger investors were more likely to accept robo advice, with a marked drop off in acceptance among investors aged over 55. While overall young investors may be more likely to accept robo advice, there are plenty young people who are not. These young robo-rejecters are also less likely to seek professional advice of any kind.  Also, women were more likely to accept robo advice than men.

Investors who rejected advice from algorithm were asked what would they do as an alternative - consult a human financial adviser; seek advice from friends or family; or trust their own judgement. The most common option answer (72% of cases) was to recommend advice from a human financial adviser. Women were more likely to indicate this preference.

The next most popular option among the robo rejecters was to ask advice from friends or family, an option chosen by 21%. These individuals were more likely to be young, of lower socio-economic status, less trusting of banks and have lower financial literacy.

Those who reject robo advice in favour of the third option - trust own judgement—represented the smallest group just 7% of robo-rejecters.

Edited excerpts from the survey published on FCA.ORG.UK site.

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